A&M Tax Advisor Update
The recent decision of the First-tier Tribunal (FTT) in BlueCrest Capital Management (UK) LLP v HMRC (29 June 2022) is the first case that considered the salaried member rules in the context of an asset management LLP. This is a significant case as so far, there has been no judicial consideration of the salaried member rules and businesses have had to rely on HMRC’s guidance only. In this article, we have summarised key takeaways from the decision and how A&M can help.
Some members of BlueCrest Capital Management (UK LLP) performed investment management services, some performed other back-office functions. HMRC challenged the position of the members under the salaried member rules.
The BlueCrest case only considers Condition A (disguised salary) and Condition B (significant influence), but it was the decision in relation to Condition B which is most significant.
A substantial component of the members’ remuneration took the form of a “discretionary allocation” consisting of a percentage of the profit they made on their individual portfolios less costs.
An exclusion from the salaried member rules is broadly, that more than 20% of the individual’s remuneration is not “disguised salary”. Broadly, remuneration is not disguised salary if it is variable by reference to the overall amount of the profits or losses of the LLP and it is in practice, affected by the overall amount of these profits or losses.
For members who performed other back-office functions, HMRC successfully argued that the discretionary allocation was disguised salary, as it was based on personal performance rather than by reference to the overall profitability of the LLP. The members had not provided sufficient evidence.
Another exclusion from the salaried member rules is if the member has “significant influence over the partnership’s affairs”. HMRC challenged that this required managerial influence over all of the LLP’s affairs, in line with their guidance.
The FTT took a different position. It found that certain members with responsibility for managing key investment portfolios had “significant influence” over the affairs of the LLP, even though their influence was financial rather than managerial. This decision is welcomed by members performing investment management services however for those performing back office functions, the court did not find that on the balance of probabilities, they had significant influence.
The key question for the court was whether the members had significant influence akin to that of a partner in a traditional partnership.
The FTT also considered the TAAR provision, which states that “no regard is to be had to any arrangements the main purpose, or one of the main purposes, of which is to secure that the rules do not apply to the individual”.
Shortly before the salaried member rules were introduced, board resolutions were passed by BlueCrest which prevented discretionary allocations exceeding the LLP’s available profits. The FTT disagreed that restricting allocations by reference to the LLP’s available profits prevented them from being disguised as salary.
It is questioned to what extent restructuring could be done in order to fall within one of the exclusions that would be respected, without falling foul of TAAR. HMRC has noted in the guidance that long-term, genuine restructuring would not cause an issue however it would be helpful to have more examples.
In light of the decision, it is critical to have effective policies, procedures and processes in place to manage and evidence compliance with the salaried member rules.
We have recently become aware of HMRC increasing their communications to LLPs regarding the compliance with the salaried member rules. For an overview of the salaried member rules and further information about these communications, please click here.
It is important to note that issues with the rules can arise throughout the year rather than at one point in a year so reviewing the rules should be iterative. Common issues include retests not being undertaken on a change of circumstances i.e. a member joining or leaving an LLP, lack of evidence and documentation to support positions taken, and variation of remuneration packages.
We have worked on many issues faced by clients regarding the salaried member rules, where we have helped them put together effective systems in place and in dealing with HMRC’s communications.
If you would like to discuss any of the above please feel free to get in touch with your usual A&M point of contact, Daniel Parry, Jordan Brown or Shirley Ly.